Imagine that your air conditioner breaks down and no one will give you an estimate of how much it will cost to repair it. Instead, a technician overhauls your air conditioner by doing whatever he or she feels is appropriate to fix it and then gives you a non-itemized bill for however much he or she wants. This is our current healthcare system.
I previously brought up this example in a recent article about unexpected costs associated with emergency department visits.1 Although it fails to completely capture the complexity of our healthcare system, the example is helpful in illustrating why our healthcare system does not operate under free-market rules. Patients rarely, if ever, are offered meaningful information about what their medical care costs. Moreover, they are never offered more cost-effective alternatives or provided access to information that would allow them to effectively shop around for a better deal.
The actual cost of healthcare has been hidden from patients. If you are unfortunate enough to get sick but have insurance, you will likely pay some predetermined percentage of what your insurance company has privately negotiated with hospitals and providers for the services you receive. The real cost of those services remains unknown. For example, imagine you need an MRI and let’s say Insurance A has agreed to pay Hospital A $100 for the testing. However, you live next to Hospital B and decide to go to Hospital B for the study; however, Insurance A has agreed to pay Hospital B $1000 for that same MRI possibly because that hospital B may be offering a discount on some other more expensive procedure. Regardless of which hospital you go to, you’re going to pay a 20% copay. Had you gone to Hospital A, your copay would be $20 dollars. However, since you chose to go to Hospital B, you get stuck with a $200 bill. You do not benefit from the deal the insurance company struck with Hospital B because you don’t need that other more expensive procedure that they priced out cheaper. Moreover, you’re not privy to the price difference between Hospital A and Hospital B because they won’t disclose their prices to you until after you’ve had the MRI and get the bill.
For those who do not have insurance, the situation is worse. Often, hospitals and providers bill at rates that are multiples of what they actually expect to collect. Uninsured patients are unaware of this and may get billed up to 3 times the Medicare allowable rate. Unless cash-paying patients negotiate the price of their care down, there is a good chance that they are paying too much for it. Unfortunately, because there is little to no information about what medical care actually costs, there is no way for patients to estimate what they should be paying.
On June 24, 2019, President Donald J. Trump signed an executive order that directs the Department of Health and Human Services (DHHS) to require that hospitals publicly disclose what people actually pay for services in a “easy-to-read format.”2 The goal is to make “information on out-of-pocket spending more readily available to patients before they receive care.”2
The premise underlying the executive order is that if patients were informed about what hospitals and providers are charging for their services, then they would be able to shop around for better deals.2 This competition would thereby drive the cost of healthcare down.3 On the surface, this is a win for proponents of a free-market healthcare system. However, many experts believe it a fallacy that the free market will drive down the cost of healthcare.3 That’s because when faced with a medical emergency, most people are not in a position to shop around for the best deal. In most circumstances, even non-emergencies, the proportion of medical care that is “shopable” is probably very small. Often, we rely on the advice of our physicians. The patient-physician relationship is an essential therapeutic partnership that supersedes any financial gain for the physician or cost for the patient. Patients often don’t consider shopping around for care because they might perceive going elsewhere as a violation of that sacred relationship.
Moreover, prices are not consumer-centric but instead centered on insurance plans. As I described earlier, the negotiations that occur between insurance companies and hospitals are always aimed toward the benefit of those 2 organizations and never toward the patient.
While most critics of Trump’s executive order believe that transparency is long overdue, they feel that the executive order is lacking in specifics and leaves much of the details up to the DHHS to figure out.4 It wasn’t long ago that the Trump administration signed an executive order aimed at reducing drug prices by prohibiting rebates to pharmacy benefit managers. However, just last month the DHHS scrapped the plan.5 Thus, although the White House is proposing this change, we have yet to see whether it will be actionable. If there is follow-through, it remains unclear which goals, if any, will actually be met.
Even if prices become available for consumers to look up and compare, there is strong evidence that only a small fraction of patients will actually use this information to shop around.4 Even the most savvy accountant would struggle to use these data in a meaningful way. That’s because for every resource, hospitals have a price specific to their negotiated contracts with each insurance company. A tablet of aspirin, for example, might have 50 different prices depending on the contract. Thus, if an individual wanted to shop around for a hospitalization, then they would need to know ahead of time every test, procedure, supply, and drug that they’re going to require. They would then have to calculate the total cost at each hospital for their particular insurance company. This task is nearly impossible. Even physicians often don’t know all that patients will need in advance of a procedure. An uncomplicated pregnancy can quickly become complicated during delivery, and an anticipated $10,000 expense can easily become a $100,000 hospital stay.
These may not be reasons to avoid transparency; however, some experts argue that an unintended consequence of exposing price information could be that these data may actually drive prices up.3 While having actual price information can help some insurers negotiate better rates with hospitals, that same information could cause hospitals to increase their costs, especially if hospitals discovered that competing institutions are getting better deals from insurers.3
I personally agree with many who believe this is a step in the right direction. I have long argued that one of the difficulties in understanding our healthcare crisis is that no one knows what anything costs. While I’m not convinced that these data will be directly useful to patients, and I also hold the reservations above, I do believe it will open a window for researchers and economists to peer into healthcare in a way that was never before possible and ultimately open the door to new solutions.
1. Marzouka G. Healthcare costs associated with emergency department visits. Medical Bag website. https://www.medicalbag.com/home/more/white-coat-chronicles/healthcare-costs-associated-with-emergency-department-visits/. Published May 31, 2019. Accessed August 14, 2019.
2. President Donald J. Trump is putting American patients first by making healthcare more transparent. Whitehouse.gov website. https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-putting-american-patients-first-making-healthcare-transparent/. Published June 24, 2019. Accessed August 14, 2019.
3. Weintraub A. Will President Trump’s hospital price transparency plan lower costs? Forbes website. https://www.forbes.com/sites/nextavenue/2019/07/02/will-president-trumps-hospital-price-transparency-plan-lower-costs/#60c49b99114e. Published July 2, 2019. Accessed August 14, 2019.
4. Appleby J. Trump team’s bid to make hospital costs more transparent is data-heavy. NPR website. https://www.npr.org/sections/health-shots/2019/07/31/746792159/trump-teams-bid-to-make-hospital-costs-more-transparent-is-data-heavy. Published July 31, 2919. Accessed August 14, 2019.
5. Simmons-Duffin S. As its drug pricing plans fall through, Trump administration turns To Congress to act. NPR website. https://www.npr.org/sections/health-shots/2019/07/11/740845050/as-its-drug-pricing-plans-fall-through-trump-administration-turns-to-congress-to. Published July 11, 2019. Accessed August 14, 2019.